Saturday, 14 January 2012

The success of dictatorial forms of state capitalism often depends on the adoption of a mob management style.

As is well known, the various Mafia families run both legitimate and criminal activities. Often, what is not realized is that successful mafia bosses learned that they could not run the two types of business in the same way. When taking over lawful businesses they leave in charge the previous managers or employ new professional mangers (often reputable citizens) but appoint a minder to remind such managers that they cannot step out of line. The minder may be a deputy, a security guard or even a driver but the manager cannot doubt that he is the eyes and ears of the boss. This way, the mafia boss avoids turning his criminal associates into lousy managers that would ruin his business while preserving their loyalty by giving them limited power and rewards.

Maverick dictators like Hitler used the same management approach. He used his rogue bunch of SS criminals to instill fear among top civil servants but left intact the efficient German army and government bureaucracy, including the famous financier Hjalmar Schacht as president of the Reichsbank.

In the early 1990s, I personally observed the same policy being pursued by Kazakhstan’s communist-era leader and for-life President, Nursultan Nazarbayev. Before independence, the Kazakhs were predominantly poor and uneducated and the Russians dominated the entire government administration. Instead of packing them back to Moscow, he maintained their positions and privileges if they accepted the tutelage of his handpicked ethnic Kazakhs.

More recently, after the Chinese took over Macau from Portugal I observed the same policy in action. While the Chinese swiftly erased many of the Portuguese symbols in the territory, they kept most of the Portuguese running its administration. They simply appointed a party member from mainland China to monitor them, often despite the resentment among local ethnic Chinese.

Although this mob style of management can be successful in the short run, as it was in the early days of Nazi Germany and as it is now in China, I do not believe that it will be sustainable.

Its failure will happen not because the Mafia’s boss family or the Party Nomenklatura are prone to end up fighting over power (although this often happens), but because of a fundamental flaw of the mob management style.

While the mob management style guarantees leadership and may substitute business shrewdness by corruption, robbery or outright threat it can never achieve investment wisdom. It cannot provide the vision and flexibility necessary to anticipate opportunities and allocate capital efficiently. On the contrary, it will inevitably overspend in low return projects aimed at rewarding political clienteles or at securing the bosses’ own glorification and security apparatus.

Therefore, despite its recent success, we believe that communist state capitalism in China is doomed to fail. Unless, of course, the Chinese reverse their ways and move towards market capitalism and democracy.